Chapter 1

The Role of Accounting and

Accounting Information
Overview
Traditional Accounting Cycle

Source Journal entries Trial balance

in the journal Post entries to
documents
the ledger

Financial statements
Adjusting and closing
Objectives
After studying this chapter, you should be able to:
• Define and describe accounting and explain how
information systems have altered the role of accounting
and the job of the accountant
• Define and describe information
• Define and a system
• Define “accounting information systems” and discuss
their evolution
• Discuss and provide examples of the role of accounting
information.
Contents
• Definition of Accounting
• Definition of Information
• Definition of System
• Definition and Evolution of Accounting Information Systems
• The Role of Accounting And Accounting Information
• Linkages Between Business Processes
• Explanation of Transaction Cycle Flow
Definition of Accounting
Lesson Overview
• The traditional role of accounting and accountants is seen
as recording the details of transactions that occur within
an organization, starting with the general journal and
going through to the preparation of the financial
statements.
• Example Accounting application:
• MYOB
• Accurate
• SAP, etc
Lesson Objectives
After studying this lesson, you should be able to:
• Define and describe accounting and explain how
information systems have altered the role of accounting
and the job of the accountant
• Define and describe information
• Define and a system

7
 1. Definition of Accounting
• The traditional role of accounting and accountants is seen as recording
the details of transactions that occur within an organization, starting with
the general journal and going through to the preparation of the financial
statements.
• Recall the traditional accounting cycle, which has typically included the
following steps:
1. Transaction Occurs
2. Analyze Transaction
3. Journalize Transaction
4. Post Journal To Ledger
5. Prepare Trial Balance
6. Adjust Entries
7. Adjust Trial Balance
8. Close Entries
9. Prepare Financial Statements
1. Definition of Accounting
• Activities in the traditional accounting cycle began to be replaced
from manual activity into computerization.
• Example Accounting application:
• MYOB
• Accurate
• SAP, dll
• A computerized information system was developed to record
and classify activities within the company
• So the role of an accountant is seen as to provide added value
and to provide information for the needs of the organization
1. Definition of Accounting
• For example: consider the following two quotes from 2 professionals in
accounting from Australia
• CPA (Certified Practising Accountants) Australia
• Accounting is the language of business
• Everything a business does relates somehow to money...
Accountings studies give you the tools to understand how and why
key decision are made, and to have input into those decision. If you
want to be a finance and accounting specialist, you will play a key
role in managing the money. If you want to specialise in another
business discipline, a knowledge of accounting will be a great help
to you
• ICAA (Institute of Chartered Accountants in Australia)
• A chartered accountant (CA) as someone who works at the heart of
business, offering skills to a range of organizations and providing
solutions to wide variety of business problems. Cas advice on just
about all aspects of running a business, from strategic planning, to
tax and compliance work
1. Definition of Accounting
• Accountants in the 21st century should be comfortable
with the concept of information systems because
computerized information systems play an important role
in the improvement and management of functions within
organizations, as well as how to manage knowledge and
data resources in organizations
2. Definition of Information
• Data are the raw facts relating to or describing an event.
• Example:
• to a sale could include the sale date, salesperson,
customer involved, items purchased, sale price and so
on.
• Every time a sale occurs, this data will be gathered
and recorded in the accounting system. The main
details will be captured in the journals and
subsidiary ledgers.
• Data become useful when they are subject to the
application of rules or knowledge, which enables us to
convert data into information.
2. Definition of Information
• Information is used in decision making and can prompt action, as
well as be a guiding tool for decision making.
• Examples of this could include weekly sales summaries, sales
by customer reports, profit margins per customer and so on.

Sales Journal
2. Definition of Information
• Alternatively, the data could be summarised on a basis of :
• customer by customer,
• sales by geographic region (assuming geographic region data
are available).
• sales by product type and so on.
• When this is done, the data be-come more meaningful and easier
to work with.
• Information is data that has been processed and has meaning for
the user.
• Information Overload when an individual has information that
exceeds their needs and can produce meaningfully decisions
when needed.
• Organizations should be aware of the information needs (in the
form of reports, or other forms of information) and should be
guaranteed information relevant to the person who needs it.
3. Definition of System
• A system is something that takes inputs, apply a set of rules or
processes to the inputs to generate outputs.
• Input can include data, as well as other resources, that are the
starting point for a system.
• As an example, a list of inputs into an accounting system could include
thedata relating to the transactions that occur, with this data coming from
the various source documents that an organisation generates and
receives in its normal business operations.
• There are several alternative available for an organisation to choose from
when determining how the inputs to a system are going to be captured.
These can include: keyboard, barcode scanner, image scanner,
Magnetic Ink Character Recognition (MICR), voice recognition, Optical
Mark Reader (OMR)
3. Definition of System
• The processes are the sets of activities that are performed on the
inputs into the system.
• Checking the format of data in input and data validation, for
example: data input of goods sold, price and quantity
• Manipulating input data (calculating data and adjusting
inputted data)
• Calculations, for example: calculating multiplication
between price and quantity
• Data adjustment, for example: confirm customer's credit
card number
• Then the data is stored to the data storage (database)
3. Definition of System
• Output refer to what is obtained from a system, or the result of what the
system does
• Example: ln the sales system outputs will typically include reports for
decision making.
• For example: could be receipts and invoices that are given to
customers when a sale is executed,
• For example: sales summary reports used by management to assess
performance and other such reports.
• When designing a system, it is a sound practice to consider what outputs
are required as a starting point.
• if it is not known what outputs are required from a system, then it can
hardly be ensured that those outputs can be generated from the
inputs that are being gathered.
• lf, for example, customer details were not gathered when sales data
were being input into the sales system, then it would be impossible to
generate a sales report that breaks sales down by customer.
3. Definition of System
• Feedback is the method used to ensure that the system is
running normally and there is no problem
• Example: customer datum, customer code inputted into
the system, then the system will execute it and check
whether it is in accordance with a predefined and valid
format
• If the system finds an error eg: customer code in
accordance with the predefined provisions of alpha-
numeric, but inputted in the form of numeric, then the
system can provide a response / warning so that the
user input in accordance with the established
provisions
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3. Definition of System
• System Scope is: domain or problem covered by the system
• In running the system sometimes also involves the external environment
• External environment is a factor or pressure from outside parties
that affect the design and operation of the system
• As an example, an accounting system within an organisation has the
scope of preparing the financial statements that the organisation
provides to its shareholders and other dependent users of the
financial information. The financial reporting system operates within
the environrncnt of the relevant accounting rules, regulations,
generally accepted accounting principles ((GAAP) and standards that
govern accounting practice. These rules and regulations are
established externally through bodies such as the federal and state
governments and the Australian Accounting Standards Board (AASB),
yet they have a definite impact on the way that the accounting system
is designed and operates within an organisation.
3. Definition of System
• Each of these systems can be broken down and analysed in terms of their
inputs, processes and outputs.
• The systems analysed include the sales, payments and purchases
systems. These three systems form the spine of most organisations and
an understanding of the inputs, processes and outputs within them is
essential.
• They are three different examples of the more generic transaction
processing system (TPS), which is a system designed to capture and
record events that occur in a business's operations.
• They can be customised to different types of transactions, including
a purchasing TPS to handle purchases, a human resources TPS to
handle payroll and associated human resources transactions, a sales
TPS to handle sales activities and so on. Other system types that you
may come across in organisations include decision support systems
and expert systems.
4 Definition and Evolution of
Accounting Information Systems
• Accounting Information System is an information
technology based application used to capture, verify,
store, sort and report data related to organizational
activity
Accoungting dan Information System – A Changing Relationship 24
4. Definition and Evolution of
Accounting Information Systems
• A brief history of accounting information systems
• It is fairly uncontroversial to say that nowadays ’accounting is a
data management function dependent upon information
technology.
• While accounting as a bookkeeping function can be performed
manually, most organizations have computerized their accounting
process to some extent, ranging from a stand-alone PC with a
package such as MYOB running on it to the large organization that
implements an ERP system throughout the organization to
manage all the business processes.
• Pacioli’s development of the double-entry accounting system was
the first real step towards a classification scheme and framework
for converting data about economic events into useful information
about business performance. Before the emergence of double-
entry accounting techniques, record keeping was based mainly
around recording economic activity — that is, gathering data.
These data were seldom summarised or convened into
information.
4.Definition and Evolution of
Accounting Information Systems
• The first double-entry accounting systems were operated
manually, which created a great potential for errors and
inaccuracies during the capturing, transcription and classification
of data, as well as during the reporting of information.
• By the late 1800s firms began to create less labour-intensive
methods for operating their accounting information systems,
including adding machines and cash registers.
• These developments allowed for data to be more efficiently
captured and provided for the use of batch totals within the
organisation.
• This emergence of batch totals is significant in terms of the
controls that operate in the organisation, evidenced in chapters 7
and 8 on internal controls.
4.Definition and Evolution of
Accounting Information Systems
• Punch cards were soon developed as a means of data entry and
storage, and IBM emerged in the marketplace with several
developments in machines that were able to verify,sort and total
data, handling debits and credits.
• Punch cards introduced flexibility into a firm’s accounting
information system, because the individual cards could be sorted
and processed in a variety of ways to attain different results — for
example, sales by product, region and so on — that the traditional
sales journal struggled with.
• Thus emerging in the accounting information system is the ability
to apply different perspectives to data to convert them into
information.
4.Definition and Evolution of
Accounting Information Systems
• Until the 1970s, information systems were seen as a support tool
for the accounting function: the technology was provided to
enable accounting to be done better. Information systems were
almost a subset of the accounting function, acting in support of
the accounting requirements.
• As technology continued to develop, including management
information systems, database technology and electronic data
processing technologies, and with the emergence of the
microcomputer, organisations began to see that the technology of
the computer could be applied beyond the domain of the
accounting function.
• The effect of this realisation was that the information systems
function began to develop an identity of its own, becoming more
distinct from the accounting function, which had previously
subsumed it.
 5. The Role of Accounting and
Accounting Information
• What sort of decisions need to be made within a firm that require accounting
information? Consider the following hypothetical examples:
1. A customer wants to make a purchase on his or her store credit card.
• In this situation, accounting information can be used as a tool for deciding
whether to approve the credit sale.
• The store may check the customer's credit history, including any past
defaults on payment, to determine his or her credit worthiness.
• Additionally, the account balance already owed by this customer may be
compared to the customer's individual credit limit, to assess whether there
is sufficient space on the customer's account for the transaction to proceed.
• In this example can be seen the use of accounting information as a part of
the authorization process:
• if the customer's credit history is satisfactory, then the credit sale will be
authorized to proceed. Many organizations have developed expert
systems and neural networks to aid the credit rating and approval
decision.
• These examples of artificial intelligence draw upon the accounting data
that are gathered by the accounting information system and automate
the credit approval decision.
5. The Role of Accounting and
Accounting Information
2. The business needs to decide how much inventory to order for
the coming month.
• When deciding how much to purchase from suppliers, an
organization needs to have an estimate for its expected sales in
the coming month, because it does not want to purchase too
much or too little stock.
• Estimates of sales and demand from the product can be gained
in a variety of ways, one of which is to forecast based on past
sales figures and trends. Underlying this are the accounting
data on sales that are used to form the forecasts.
• In this example, accounting information is being used as a
planning tool within the organization.
5. The Role of Accounting and
Accounting Information
3. The organisation needs to assess the bad debts amount at the
end of the financial year.
• Past sales, ageing information and bad debts information
stored in the accounting information system can also be used to
estimate probabilities of a debt in an age group going bad.
• Thus the accounting data and information they are used to
generate are essential parts of the organization's decision
making and reporting.
• The information being used in this example is not restricted to
financial statement information-information about the age of
accounts receivable and the probability of debtor default is not
generally made public.
• However, it would usually be available to those within the
organization, through the accounting information system, for
decision-making purposes such as valuing bad debts.
5. The Role of Accounting and
Accounting Information
4. Managers need to evaluate the performance of the factory staff
and how well resources have been used in production.
• Accounting information plays a role in evaluating this aspect of
business performance, with budgets and variance reports key
assessment tools.
• At the commencement of the accounting period organizations
will have a budget for manufacturing levels, which will
forecast materials usage, based on expected production levels.
At the end of the period management will rescale the budget,
based on actual levels of production, and compare this
rescaled budget to actual costs and material usage.
• Any significant differences between actual and budgeted
outcome will be followed up and investigated by management.
This is an example of accounting information being used as a
control
 Where Next?

Framework Topics Discussion 33

 Discussion Framework
• Part 1: System Fundamentals
• Part 2: System Characteristics and Considerations
• Business Processes
• Database Concepts
• XBRL Reporting
• System Documentation
• Internal Control
• Part 3: System In Action
• Transaction Cycle: The Revenue Cycle
• Transaction Cycle: The Expenditure Cycle
• Transaction Cycle: The Production Cycle
• Transaction Cycle: The HR Management and Payroll Cycle
• Transaction Cycle: The General Ledger and Financial Reporting Cycle
• Part 4: System Issues
• System Development
• Auditing and Governance of Accounting Information Systems
• Ethics and Cybercrime

34
Linkages between business processes 35
Explanation of Transaction Cycle Flow
Flow Explanation
1 The sales department will send data about sales forecasts or order levels to the
expenditure process so that appropriate levels of goods can be ordered to meet
customer demand.
2 The revenue process will forward data to the HR -process so sales staff can be
paid (e.g. based on hours worked or commissions based on sales levels). Details
about staff sales levels may also be used for performance review purposes.
3,4 The revenue process will communicate with the production process in the case
of a manufacturing organisation, with sales forecasts determining planned
production levels and raw material acquisition. Similarly, manufacturing would
inform sales staff about finished goods or goods approaching completion.
5 Manufacturing will communicate with the expenditure process to ensure the
necessary raw materials and resources are acquired for production.
6 The expenditure cycle will communicate with the general ledger and financial
reporting cycle so that details about expenditure are appropriately included in
the accounting records. This will include updating ledger accounts and including
the data in the financial statements. 36
Explanation of Transaction Cycle Flow
Flow Explanation

7 HR will communicate with the general ledger and financial reporting process so that
details about payroll-related items, including leave and other entitlements claimed by
employees, are incorporated into the accounts. Provisions for annual leave, long
service leave, income tax payable and sick leave are then updated. The details will also
impact on the profit and loss through line items such as salaries expenses and annual
leave expenses.
8 Production will communicate with the general ledger and financial reporting process to
update the ledger accounts for the details of goods produced or in the process of being
produced. This will impact on statement of financial position accounts such as finished
goods, work in process and raw materials. Profit and loss will also be affected by the
allocation of direct costs used in manufacturing and the overhead costs accumulated
as goods move through the production process.
9 Sales will communicate with the general ledger and financial reporting process so that
details about sales and revenue-related activities can be appropriately included in the
accounting records; for example, revenue in the income statement, the balance of
accounts receivable on the statement of financial position and the cash receipts from
customers on the statement of cash flows.
37
Lesson Summary
After studying this lesson, you be able to:
• Define and describe accounting and explain how
information systems have altered the role of accounting
and the job of the accountant
• Define and describe information
• Define and a system
• Define “accounting information systems” and discuss
their evolution
• Discuss and provide examples of the role of accounting
information.
Unit Summary
After studying this lesson, the student be able to:
• Define and describe accounting and explain how
information systems have altered the role of accounting
and the job of the accountant
• Define and describe information
• Define and a system

39
Question & Answers